Monday, August 15, 2011

MAKO Surgical (MAKO) - Cheap Vega, Cheap Gamma, High HV

MAKO is trading $32.09, up 1.1% with IV30™ down 8.5%. The LIVEVOL® Pro Summary is below.


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MAKO Surgical Corp. (MAKO) is a medical device company that markets its advanced robotic arm solution and orthopedic implants for orthopedic procedures.

This is a vol blog with a calendar and incorporates a recent earnings move. Though the stock just came up on the calendar spread real-time custom scan, there's more to it than that. Let's start simple:

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Let's start with the Skew Tab, below.

We can see the front is elevated to the back, especially to the downside puts. An interesting note, MAKO released earnings 8-8-2011 AMC. The stock gapped up $7.48 the next day from $21.40 to $28.88 (close-to-close) or just under 35%. Since then the stock has climbed to over $32.

Let's turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

The stock rally is evident, but check out the vol portion (bottom). Check out how low IV30™ is relative to the short-term historical vol (HV20) and the long-term historical vol (HV180). Specifically:

IV30™: 58.09
HV20: 145.08
HV180: 70.41
HV10: 200.16

So here's a case where the implied has collapsed off of earnings, even in the midst of a market sell-off, while the stock itself has moved what's now more than 3x the implied over the last ten trading days. Hmmm...

Finally, let's look to the Options Tab (below) and look at specific vol levels.

Potential Trades to Analyze

1. Calendar Spread
The put side of the Aug/Sep calendar looks interesting. The Aug 30 puts are priced at ~78 vol while the Sep 30 puts are priced at ~59 vol. Or, in English, the Aug puts are priced eight points above the long-term historical average (HV180) and the Sep puts are priced eleven vol points below it.

The risk here, of course, is the short gamma (more so I think than the long vega). With the stock moving at 200 annualized vol over the last ten trading days, maybe 78 vol is too cheap? Worth some discussion though, I thought.

2. Buying vega
Maybe owning the vol in Sep in and of itself is an interesting trade to analyze -- it's a different kind of risk as the premium is higher, but it does eliminate the short gamma in the front month when compared to the calendar.

This is trade analysis, not a recommendation.

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  1. Ophir,

    What is the purpose of the final 2 parameters in your scan? What does the sigma 1 and sigma 2 scans do and why are they set at 1? Are they simply saying that the front two months have to have an IV greater than 1%?

  2. Hi Kevin,

    Exactly right. It's a data integrity check, that's all.